Corruption Decreases Technology Adoption in Emerging Markets

K. SudhirApril 28, 2015

Technology adoption is lower in emerging markets with corrupt business environments, and higher in those with good transparency and enforcement, according to a new study forthcoming in Marketing Science.

The study found that firms in emerging markets suffer from the “Peter Pan Syndrome.” Like the fictional boy who never grows up, firms prefer to remain small and operate in the informal sector to avoid taxes and regulations. Adopting the computers and information technology systems that would allow them to grow would also increase transparency, opening them up to enforcement and auditing.

“If you’re cheating, you want to keep it hidden. Small retailers would rather not grow, be corrupt, and avoid taxes than grow and take advantage of the economies of scale that technology offers,” says study co-author K. Sudhir, a professor at the Yale School of Management and director of its China India Insights Program.

To study whether emerging market firms make a tradeoff between productivity and transparency in adopting technology, the authors looked to India’s retail sector. Although it is the fifth largest retail sector in the world, it lags behind those of peer emerging markets in modernizing its technology systems. The authors examined survey data from 1,948 retailers across India, including store managers’ perception of the level of state and peer corruption. They augmented the survey data with other data on corruption and enforcement, controlling for other variables that might affect computer adoption, such as literacy rates and wages.

The study results also show that retailers’ belief that staying small and evading taxes is a competitive advantage is unfounded. The authors compared the productivity of firms that are identical in every respect except for computer adoption and found that computers increase store productivity by 50% to 70% on average.

For government and policy makers, the study suggests that reducing corruption and providing consistent regulatory enforcement would have a positive effect on the amount of taxes they collect, but would also benefit the tax base by creating an environment that allows firms to grow.

“Corruption is an insidious disease that debilitates an economy in a much larger way than meets the eye,” says Sudhir. “We understand many of the big, visible effects of corruption, but the less visible secondary effects on day-to-day decision making across millions of firms, like whether or not to adopt a computer that can augment productivity, should give us even more pause. Corruption’s hidden costs on the economy, growth, and development may be even bigger than the visible and known effects.”